Monetary Policy Implementation with an Ample Supply of Reserves

47 Pages Posted: 24 Jan 2020

See all articles by Gara Afonso

Gara Afonso

Federal Reserve Bank of New York

Kyungmin Kim

Board of Governors of the Federal Reserve System

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Simon Potter

Federal Reserve Bank of New York

Sam Schulhofer-Wohl

Federal Reserve Bank of Chicago

Date Written: January 1, 2020

Abstract

Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called “ample” reserves. The Federal Reserve’s announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.

Keywords: federal funds market, monetary policy implementation, ample reserve supply

JEL Classification: E42, E58

Suggested Citation

Afonso, Gara and Kim, Kyungmin and Martin, Antoine and Nosal, Ed and Potter, Simon and Schulhofer-Wohl, Sam, Monetary Policy Implementation with an Ample Supply of Reserves (January 1, 2020). FRB of New York Staff Report No. 910, January 2020. Available at SSRN: https://ssrn.com/abstract=3524621 or http://dx.doi.org/10.2139/ssrn.3524621

Gara Afonso

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Kyungmin Kim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Simon Potter

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6309 (Phone)
212-720-1844 (Fax)

Sam Schulhofer-Wohl

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sschulh1.wordpress.com

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